Fischer Black and the Revolutionary Idea of Finance

Wiley, 2005

15 min read

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Fischer Black`s ideas created a revolution in finance, almost in spite of his aloof personality and contrarian approach.

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Author Perry Mehrling’s excellent book is not merely a biography of Fischer Black, but also the story of the main threads of economic thought during the late twentieth century. More than that, it is the story of the economics profession, and of the great role that politics and personality plays in the acceptance of ideas. It is astonishing to learn how ruthlessly the profession excluded Black’s ideas, although he was one of the most incisive economic and financial thinkers of his time, and it is inspiring to see how relentlessly and quixotically Fischer Black continued to press them. The parts of the book that are generally accessible are also fascinating. Unfortunately, far too little of the volume is accessible to the average business reader. Mehrling does a less than adequate job of explaining the great themes of Black’s life and thought to lay readers. He notes the importance of the Capital Asset Pricing Model in Black’s philosophy, but his account of the model will leave noneconomists scratching their heads. The same must be said of his account of other economic subjects. While getAbstract.com finds that only readers with a fairly deep understanding of economics can reap this book’s full harvest, that caveat should not deter the general reader from gleaning.

Summary

Fischer Black’s Wild Notions

Fischer Black was unquestionably one of the founding figures of the science of financial economics. Yet he never took a course in economics or finance - a fact that may be the key to his creativity. Because Black did not know how one was supposed to think about the great questions of economics, he thought about them differently, uniquely and most productively.

The Capital Asset Pricing Model (CAPM), more or less simultaneously but independently discovered by Jack Treynor, William Sharpe and John Lintner, was critical to Fischer Black’s worldview. He was working with Jack Treynor at Arthur D. Little (ADL) while Treynor was developing his ideas, and he took the implications of CAPM much farther than its creators had thought to take them.

At its most elementary, CAPM is a model to show how people can hold risky stocks without taking more risk. The key is to hold stocks whose risks are uncorrelated, or widely diversified, so that they balance each other. An investor cannot expect to gain a reward from a risk that diversification could eliminate. Investors only gain rewards by taking risk, so you could think of risk as the price of reward...

About the Author

Perry Mehrling is Professor of Economics at Barnard College of Columbia University. He is also author of The Money Interest and the Public Interest: American Monetary Thought, 1920-1970.

Perry Mehrling

Fischer Black and the Revolutionary Idea of Finance

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Fischer Black’s Wild Notions

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